In Client Report GSE118, FedFin begins our analysis of the impact of the U. S. mid-term election on financial markets.  We start with the outlook for GSE reform.  Although seemingly a less critical matter for the global markets than the Dodd-Frank provisions up for revision or even repeal, we think GSEs will be Congress’ top financial-market priority next year.  In this report, FedFin explains why and then proceeds to identify near-term issues for mortgage securitization, as well as broader issues – most notably the imminent need to hike the U.S. debt ceiling – that will have immediate impact on the forthcoming debate. This report then turns to the two critical policy problems facing both the Administration and Congress on the GSE front:  a transition to successor entities and selecting the shape of these successors.  Although often overlooked, the Federal Home Loan Banks will feature in this debate and FedFin thus also assesses their outlook.  FedFin expects the FHLB system to be maintained more or less as is, but placed under tight systemic regulation (see FSM Report SYSTEMIC29). Fannie and Freddie will, we think, gradually transition into largely-private entities with a federal catastrophic-risk backstop.  Fiscal policy – the budget impact of these reform options – will be the defining criterion for what the Administration proposes and how Congress then disposes of these high-profile recommendations.

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